By Mike Walters
InsuranceNewsNet
Dec. 9, 2010 -- Why would RIA registration be a death blow to many advisors? Many will not like the truth of what I have to say.
IMOs and FMOs are promoting cracker-jack-box RIA registration left and right. Custodians are promoting that the “break-away” advisor (those leaving large wirehouses) should become a stand-alone RIA. If the concept is being so highly promoted how can it not be the right thing?
Remember that tongue in cheek one-liner? -- “Hello, I’m from the government … I’m here to help.” Yeah, same deal.
Now don’t stop reading and run-off misinterpreting what I’ve just said. There are some great reasons why certain professionals may choose to become RIA registered. But that doesn’t mean that the insurance agent who doesn’t want to take (or can’t pass) their Series 6 or Series 7 exam should then default to RIA. It also doesn’t mean that registered reps who are tired of Finra or their B/D should default to RIA only to learn (too late) that they are now a “fiduciary,” and are entirely responsible for all their own compliance and oversight, and they now answer directly to all regulators by their lonesome.
You get the point.
It has long been said that it is bad idea for anyone to become an RIA with less than $100 million under management. In fact, the state securities bureaus and SEC recently sent a validation of this message in their wanting to “up the ante” and have the threshold be at $100 million for the distinction between SEC-Registered RIAs and state securities registered RIAs. Furthermore, after the whole SEC Rule 151A near-miss, the states are likely to ramp-up audit and oversight procedures significantly in order to validate and protect their turf. Then, even further beyond that, Finra is in the pole position for SEC assignment of additional RIA oversight in the near future.
That about kills the cracker-jack-box pitch of eliminating regulatory oversight.
Not to mention, through our in-house attorneys and out-house legal counsel (they love my out-house reference), we continue to hear rumblings of eventual RIA requirements for a full-time CCO (chief compliance officer) and possible equivalent to the B/D FinOp (financial and operations principal). Why is this being predicted? Well, it begins with the existing conflict of interest in having the person who “made the sale” being the same person who “determines if the sale is suitable”. Obviously, this will change all the dynamics and economics of running a small RIA business.
But wait you say, “All I’m trying to do is get away from the brewing source-of-funds issue…”
You just might be trying to put out the fire with gasoline.
Let’s look at the source-of-funds debate and/or rules (depending upon your state).
Basically the premise is this … If an insurance-only licensed individual sells a fixed annuity to someone and the funding for the sale comes from a security (source-of-funds equals a mutual fund, variable annuity, etc.), the assumption is that the insurance-only licensed individual must have “given advice” on a product line they are not licensed to represent in order to dislodge the money and execute the annuity sale.
H’mm … Yep, that’s what happened all right. You see, the difference is (in my opinion) that the regulators were dead-wrong on SEC 151A. Indexed annuities are NOT securities. However, they are accurately identifying how the real world works regarding source-of-funds. And, for what it’s worth, this horse is already out of the barn and I don’t see this one turning around.
Now back to the RIA issue at hand. Yes, it is true that a RIA can speak to securities issues. But does the RIA fully comprehend the gray area they enter into when “giving advice” to dislodge money for a competing sale? Where does the RIA fiduciary component begin and end? Who is to determine such? What are the potential ramifications to a small RIA who does not have a suitability and ad review department? The questions mount up quickly.
But wait, wait, wait. What if we are talking about a seasoned securities professional who wants to break away from their B/D as a registered rep or their RIA as an investment advisor rep in order to become a stand-alone RIA?
The answer is, “It’s similar but different.”
Similar in the sense that you still need critical mass in order to economically justify what you are about to bite off. Additionally, you must be prepared to go-it-alone not just on all the compliance-oriented stuff we’ve been discussing, but also your newfound custodial administrative and processing issues. Simply put, what a clearing firm is to a B/D is essentially what a custodian is to a RIA. So now as an RIA you will be working with a “no-buffer zone” in direct connection with the custodian enjoying no expertise or support from a B/D (or institutional RIA) running shotgun for you. No doubt your business liability, complexity and administrative burden jumps significantly.
So what do you REALLY think?
My contention is simply this:
Most RIAs are not money-managers, they are asset-gatherers. Most RIAs do not get paid for “managing money.” They get paid for “managing relationships” and placing money in various investment and insurance vehicles.
Managing money and managing relationships are two extremely different jobs defined by extremely different skills. Take the conversation out of our business for a moment and consider a parallel scenario. Would it make any sense at all to have an engineer in charge of sales and a sales professional in charge of engineering? Well, this is what happens to most folks as soon as they register as an RIA. The sales professional ends up making such a big mess out of the engineering department that eventually no one has any trust in the leadership, which results in plummeting sales.
The last thing anyone anticipates during their decision to become an RIA is their dramatic reduction in sales time and their future being dominated by plummeting sales.
Beware: Even if you enjoy critical mass, there may be far superior ways to skin this cat (but that’s another article).
Mike Walters is CEO of USA Financial. “The World’s Only IMO, BD, Double RIA, Lead Gen & Best Practices Firm.” For professional level access to legendary free reports, audiocast, videocast and commentary, visit www.usafinancial.net. For temporary online access to further in-depth analysis related to today’s topic visit www.usafinancial.net/AnnuityNews2010dec/
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